Both situation are bad, best is a very small inflation rate of .5 to 1.5% annually, because usually, in normal (good) times in the U.S. workers are given wage increases of 3-4% annually. In that situation, with an average inflation rate of 1.5% for all annual expenses, the worker is getting a little more wealthy each year.

But to answer question one, Yes and No. Falling prices do not help the economy by spurring consumer spending. Yes, they help the consumer in the very short term for very small items and non-durable goods (non-durable goods are goods that are used up when used once, or that have a lifespan of less than 3 years), but for durable goods (a good which does not quickly wear out, or more specifically, it yields services or utility over time rather than being completely used up when used once)deflation is very bad.

(from Wikipedia) <http://en.wikipedia.org/wiki/Durable_good >
Examples of consumer durable goods include cars, appliances, business equipment, electronic equipment, home furnishings and fixtures, housewares and accessories, photographic equipment, recreational goods, sporting goods, toys and games....

...Examples of non-durable goods include cosmetics, food, cleaning products, fuel, office supplies, packaging and containers, paper and paper products, personal products, rubber, plastics, textiles, clothing and footwear....

So since most non-durable goods are made my machines, which are more and more run by computer which make the need for human workers less and less every year and the fact that most of the durable goods listed above are now imported from lower wage countries, deflation quickly leads to unemployment which causes consumer spending to fall, and since unemployed people spend less on everything, but especially durable goods, it leads to more price cuts and more deflation...

To put it simply (and crudely), in a time of deflation, when the American economy is something like 70% consumer driven (or at least it was before the house of cards began to collapse), WE, the lower 97%, are F*cked.

And to answer question 2 directly, (2) Do wages contract in an deflationary environment? Yes, it's called unemployment or part-time employment.